Monthly Archives: November 2009

Always an interesting conference for hard-core securities practitioners, I attended the ABA’s Fall Meeting for the “Federal Regulation of Securities Committee” in DC a week ago Friday. This year’s meeting drove me to despair as it became evident that the finest minds in the securities bar didn’t have a complete grasp on what was happening in Congress. If those of us “inside the Beltway” and normally plugged in didn’t have all the answers, who does? No one, probably not even those working on the Hill.

The sheer pace of changes to proposed legislation – not to mention the large number of bills being floated – makes this a time unlike no other during my career. Truly anything can happen and at any time (eg. see this blog and this follow-up blog). Lobbyists are making their marks felt and who knows what type of regulatory framework we will end up with.

Even as senior Corp Fin Staffers laid out a blitzkrieg of upcoming proposals and adoptions during a panel, it was hard not to think about the real background and cause for concern these days. The great unknown of Congress. In terms of keeping up with the latest developments, the next few months may be our greatest challenge yet…

SIGTARP’s Latest Audit Bashes New York Fed’s Handling of AIG

Just as Congress readies legislation to enhance the oversight powers of the Federal Reserve (although this action taken by the House Financial Services Committee would move “too big to fail” power from the Fed to a new “Financial Services Oversight Council”), the TARP’s Special Inspector General released its audit of how the Federal Reserve Bank of New York handled the AIG crisis. As noted in this NY Times article, the report is not good news for the Fed, including now-Treasury Secretary Geithner.

Dissecting the Dodd Bill’s Broker-Dealer Provisions

In this podcast, Bob Colby of Davis Polk (and former Deputy Director of the SEC’s Division of Trading & Markets) provides insight into the broker-dealer provisions of the Dodd bill and what we can expect to see, including:

– What is the background of the broker-dealer provisions of the Dodd bill and how did they come to be?
– How would the Dodd bill affect broker-dealers if it is passed in its draft form?
– How does the Dodd bill differ from the House’s bill on broker-dealers?
– What are the odds of passage of the broker-dealer provisions of the Dodd bill?

Yesterday, a very special person in the DC community passed away. Although long-timer owner of the Washington Wizards (formerly the “Bullets”) was considered by many to be “old-school” in the way he approached his team – really running it like a family business, often hiring old players for management positions – he truly was a visionary in the way he gave to the community.

For over forty years, Abe spent lots of time and money in the poorest parts of town – always on the sly, never seeking recognition. If you heard some of the stories last night on talk radio here in DC (like this one), you couldn’t help but tear up. He gave opportunity to countless youths back in the ’60s, ’70s and ’80s – and you could hear how those people were then inspired to do the same. Abe created generations of people willing to help others.

Abe completely changed the nature of the city itself. He spent his own money – spending most of his fortune – to build the Verizon Center a decade ago. This in an era where most sport owners threaten to move a team if the locals don’t pony up and pay for a new stadium. That alone sets him apart. But Abe took the next step and insisted the stadium be built in a part of town that was essentially dead, just down the street from where the SEC’s old HQ sat (rather than build it in a suburb).

That part of town now is the apple of DC’s eye and its revitalization is continuing to spread outward. The transformation is amazing to behold – and it’s all due to one man. As we give “thanks” tomorrow, remember that one person can – and will – make a difference. Don’t give up in your struggle to reap the rewards of your own efforts to help others. Abe felt our love every day, as he has been the hero of this city for years. There are many tributes on the Web today like this WaPo article.

I was trying real hard to not blog at all this week (which would be a first in years) – but I just can’t help myself. That is one downside to becoming a blogger – you look for story ideas in everything you do (or at least, you should be). For every blog I post, there are three that lay in draft form for months and months until I finally delete them as unworthy or untimely. And my blogging style isn’t even that involved – I favor fairly short pieces that link to more information from other sources.

But as Francine McKenna of “re:theauditors.com” fame describes in this blog, there is another downside to blogging. By blogging, you become a journalist whether you realize it or not – and with that, you open yourself to the world. It comes with the territory.

The good news is that the upsides of blogging far outweigh the negatives in my opinion. You only live once and blogging gives you a great opportunity to connect with like-minded souls. And that’s just a personal benefit. There are numerous professional benefits. Read more about the pros/cons of blogging and whether you have what it takes to blog in my article from the “Summer 2008” issue of InvestorRelationships.com (which is still a free publication).

Microsoft’s Shareholders Vote on Say-on-Pay

Last week, Microsoft held its annual meeting, including its first triennal vote on pay (which received 99% support). In this blog, Microsoft’s Deputy General Counsel John Seethoff describes the results of the meeting – and links to this Roll Call op-ed by Carpenters Ed Durkin and Microsoft’s GC Brad Smith on why a three-year cycle for say-on-pay makes sense.

So What About the Ohio AG’s Lawsuit Against the Rating Agencies?

In his “D&O Diary” Blog, Kevin LaCroix examines the latest efforts to bring the credit rating agencies to bear for their role in the financial crisis. Good stuff.

Since every company should now consider addressing walkaway numbers in this year’s proxy statements, we have devoted the “Fall ’09 issue of Proxy Disclosure Updates” to analyzing how to draft this type of disclosure. We even provide a model walkaway disclosure in this critical issue.

You will receive this issue, which is posted on CompensationDisclosure.com, by taking advantage of a no-risk trial to Lynn, Borges & Romanek’s “Executive Compensation Service” for 2010 (which includes the 2010 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide” that we mailed last week to those that ordered the Service).

Act Now: As part of the Lynn, Borges & Romanek’s “Executive Compensation Service,” if you try a no-risk trial now, not only will you receive the walkaway issue described above and the 1000-page plus Executive Compensation Disclosure Treatise, you will also receive the Winter issue of Proxy Disclosure Updates – with important new proxy disclosure guidance – soon after the SEC adopts its new executive compensation rules.

Corp Fin’s Chief Accountant Speaks: What’s Doing

In FEI’s “Financial Reporting Blog,” Edith Orenstein provides a rundown of remarks from Corp Fin Chief Accountant Wayne Carnall at an FEI conference recently. Here are related notes from WebCPA. [I’ll be down at the ABA meeting in DC today and will blog next week about any gloss Pat McGurn provides on these 2010 updates to RiskMetrics’ policies that came out last night.]

It is good to hear that Corp Fin’s “Financial Reporting Manual” will be updated soon to include 25-years worth of content based on meeting with the “CAQ Regs” Committee. Although as Edith tweeted, there could be a downside to adding 780 pieces of guidance (or subset thereof) to the Manual. That’s gonna be hard to memorize. [I’ll blog on Monday about the nature of the accounting proposals that passed the House Financial Service Committee yesterday, as reported by Edith. Too much going on.]

I laughed pretty hard reading Edith’s notes about the “secret societies” that meet with the SEC. Trust me, those meetings are not as exciting as they may sound – at least the ones I’ve been to.

Shocker! Rich Ferlauto Heading to the SEC

I almost fell off my chair when I read this press release yesterday that Rich Ferlauto is leaving AFSCME and joining the SEC as Deputy Director of Policy of the agency’s Office of Investor Education and Advocacy. It will be interesting to see if AFSCME will continue to be so active regarding shareholder issues without Rich – and it will also be interesting to see Rich wearing short-sleeve shirts and smoking from a corn cob pipe…

Here are some thoughts about Twitter that I posted a while back on “The Mentor Blog“:

Recently, I blogged about how you need to learn about Twitter since more and more executives are using it and you need to be able to recognize the corporate & securities law issues that arise, just like any other medium. I also noted that I’ve been regularly Tweeting since the beginning of the year.

With 10-months-plus experience under my belt, I can honestly say that – at this point – there probably isn’t much marketing value for lawyers to be on Twitter. If you blog, tweeting about your blog entries can help promote your blog and I think is a “must.” But most lawyers aren’t blogging – and until they do, I wouldn’t bother being a “regular” on Twitter right now. Following the blogs that cover your industry and interests is more educational and worth your time.

For me, one of my job descriptions is “journalist” so following others with like-minded interests helps me identify story ideas for the numerous blogs on our sites – so there is some value in Twitter for me. But so far, there are few folks with like-minded corporate law & corporate governance interests on Twitter (eg. think there are only two of us with M&A law background) so the marketing value of Twitter is pretty limited for you. And too many of the folks that I “follow” on Twitter continue to tweet about their personal lives and thus clog up my Tweetdeck with all sorts of useless drivel. Sorry, I really don’t care that your cat is sick.

If critical mass is reached and the marketing value proposition of Twitter for those of us in corporate compliance becomes real, I’ll let you know. Until then, Twitter’s value is limited to informational and not much in the way of marketing…

By the way, you may want to read Bruce Carton’s recent blog about whether the number of followers you have on Twitter may impact a client’s hiring decision. I gave my ten cents on the topic in a comment to the blog.

Obtaining followers is pretty easy now since folks have learned some tricks of the trade to quickly score hordes by using scantily clad women. According to the Avvo Blog, this is exactly what some have done recently (although there may have been “hijacking” involved per this article)…and another thing about Twitter, it can get snarky, as noted in this blog.

What About Twitter for Investor Relations?

In comparison to my thoughts about Twitter for marketing purposes, we have these somewhat different thoughts about Twitter for IROs from the Q4 Blog. Here is an excerpt from that blog:

Social networks are having a dramatic impact in helping marketers and public relations professionals increase brand awareness and build new relationships with consumers. But how have these tools been adopted in the highly regulated world of investor relations?

To answer this question Q4 analyzed 80 public companies and their use of Twitter during the Q2 2009 earnings season (a new report analyzing the 3rd quarter was just released – 270 more companies are now using Twitter). Some of the findings of the report which were issued in a press release revealed that:

– 55% are using Twitter for investor relations.
– 48% are using Twitter to engage with their audience.
– 34% of the companies were from the technology sector, including Cisco, Dell, Oracle and Sun to name a few.
– 68% provided a link to their Q2 quarterly earnings release.

Bear in mind that the stats above are culled from those companies using Twitter – based on the list of companies in Q4’s report, it looks like that number is relatively small right now, about 80. The list of companies is useful for those that want to monitor what others are doing now, since Twitter may well be here to stay. Personally, I worry about companies using Twitter to get their message out because the 140 character limit can impede placing words in context. More about this later…

Full-Time IR Website Manager: No Longer a Luxury

One of the more innovative – and capable – IR departments experienced a snafu last quarter when its earnings results was accidentally posted prematurely. Dominic Jones does a great job in his IR Web Report providing three lessons that this episode delivers.

Knowing that the economy continues to wreak havoc with your budget, we have decided to freeze the prices for our publications for next year. As all our memberships expire at the end of the year, please take a moment to renew today at our “Renewal Center” for:

Comprehensive Price List: Here is a PDF that is a universal order form with the 2010 prices for all of our publications and web sites.

More on “Verifying Pay Amounts: A Company’s Special Use of Experts”

Recently, I blogged about one company’s disclosures that it used its independent auditors to check its math for its performance metrics and incentive pay calculations. Here is a response from a member:

I found this entry fascinating – to the extent anything related to executive comp disclosure can be “fascinating.” I recall that we, as outside counsel, used to prepare the compensation disclosure tables for our clients. Then, the client’s HR folks did it. Then internal finance, i.e., accountants, would do it. Given the ridiculous complexity in the rules and interpretations and the fact that liability, in my opinion, does or will attach to the disclosures, it is not surprising that a company would now have outside experts checking its work and be proud of it.

What is often not discussed when implementing these new rules is the added cost and burden created by the disclosures. Even more scary is the fact that every proxy undoubtedly has some mistakes in it. I’m sure that almost all of them are non-material. However, the risk is so great at this point that the proxy has essentially turned into a process not unlike filing a 10-K. I don’ t mean to downplay its importance but it really seems like what matters is the qualitative disclosure of why compensation committees do what they do, not adding thirteen more ways to calculate how much people walk away with.

I honestly believe that you could comply with the spirit and intent of the rules by cutting proxy disclosure in half. In fact, it would probably be more informative to investors. However, you’d have to have some serious fortitude to actually do it. To wit, over dinner conversation with very smart friends from all walks of life, they all universally acknowledge that it is a complete waste of time to read proxies because it tells them nothing meaningful about their investments. I’ve got to tell you, it is really life affirming…

Teaching IFRS in Schools

One reason why some are scared of adopting global accounting standards in just a few short years is that there is a shortage of expertise about global standards. Here is is an interesting letter regarding the testing of IFRS on the CPA exam from the Colorado State Board of Accountancy to the AICPA’s Board of Examiners: I have heard that at least some of the Big 4 have told colleges they will not hire their students unless they teach IFRS in the classroom.

Recently, Deloitte conducted a survey about whether the SEC should proceed with its IFRS roadmap – 51% said “yes” but push it back one year, 20% said approve the roadmap as proposed and 12% said to reject the roadmap entirely. Here are the results.

Tune into our webcast tomorrow – “Ask the Experts: Prepping for a Wild Proxy Season” – to hear a panel of experts provide practical guidance in a variety of areas that those grappling with the upcoming season know all too well. Note that I’ve posted the list of questions in the order that they will be asked to help you follow what’s going on and take notes.

Some big news from Davis Polk: Last Thursday, the SEC announced settled charges against SafeNet, Inc. and certain of its former officers and employees in connection with an alleged earnings management scheme that materially misstated SafeNet’s GAAP and non-GAAP financial results. What’s unique about this case is that one of the charges is that the defendants violated Regulation G by reporting non-GAAP earnings that improperly excluded certain ordinary expenses as non-recurring charges. This is the first enforcement action under Regulation G since its enactment in 2003, and it serves as a reminder that the regulation is another tool within the SEC’s already powerful enforcement arsenal.

Regulation G prohibits disseminating false or misleading non-GAAP financial measures (i.e., measures that are not calculated in conformity with GAAP, and that often exclude non-recurring, infrequent, or unusual expenses) or presenting the non-GAAP financial measures in such a manner that they mislead investors or obscure the company’s GAAP results. Regulation G requires companies to reconcile the non-GAAP financial measure to the most directly comparable GAAP financial measure.

The SEC alleges that, in order to meet earnings targets, SafeNet’s CEO and CFO directed SafeNet’s accounting personnel to improperly reclassify various expenses in both its GAAP and non-GAAP numbers. This improper accounting included:

The CEO and CFO also allegedly mischaracterized these items in SafeNet’s earnings calls. For example, in response to questions about the nature of advertising costs classified as integration expenses, the CEO asserted that these costs were “one-time in nature” when they actually related to ongoing expenses.

Even after SafeNet’s auditors required SafeNet to reclassify a significant portion of these costs as ordinary expenses and called its use of integration costs “abusive” and “a means of meeting [non-GAAP] EPS guidance,” SafeNet continued to misclassify certain items for purposes of its non-GAAP numbers. To address the disparity between its GAAP and non-GAAP numbers, SafeNet created certain bogus categories in its non-GAAP reconciliation including: “Research and Development–non-recurring;” “Sales and Marketing–non-recurring;” and “General and Administrative–non-recurring.” SafeNet used these categories to offset the ordinary recurring expenses that its auditor had refused to allow SafeNet to treat as integration expenses.

A few observations:

– Although this is the first Regulation G enforcement action, it has been clear for many years that the SEC views non-GAAP measures with suspicion and that the burden is on companies to demonstrate not only that the non-GAAP measures are useful to investors but that they have been compiled in good faith and on a reasonable basis.

– SafeNet’s alleged conduct in this case suggests that the SEC could have brought an enforcement action against SafeNet and its executives under Section 10b-5 for material misstatements even in the absence of Regulation G.

– The complaint uses that ill-defined multi-purpose SEC term of opprobrium, “earnings management”, to describe the conduct in question. Our experience is that cases like these are generally grounded in an underlying rule violation, and that “earnings management” is alleged not as the actual offense but as a motive that turns what might otherwise have been an innocent mistake into the basis for enforcement.

– Despite this case, we continue to believe that companies that are accurately disclosing and reconciling their non-GAAP numbers should feel comfortable using them. In fact, at a recent PLI conference, Meredith Cross, Director of the Division of Corporation Finance, said that she has asked the staff to review the Division’s current Regulation G interpretations and guidance to see whether any adjustments are needed because she does not want companies to feel constrained from using non-GAAP numbers that they think accurately tell their story.

As noted in this article, a New Zealand company is under fire for submitting financials to the New Zealand Stock Exchange because it included the words “fudge this” next to the depreciation line item. Here’s the letter sent by the exchange to the company inquiring about this statement…

Any other locals feel this way? I’m bummed because the Washington Post has basically killed it’s print edition with a complete redesign. The print is so small I can’t read it. They’ve forced me to read it online (which is free). Unbelievable given how the newspaper industry is on its knees…

– What’s the hardest part of writing a book?
– What was your goal in writing the book?
– Did any parts of it change as you conducted research to write it?
– How has private equity influenced deal-making over the years?
– How can the book serve to help deal lawyers in their daily practice?

Some news from Allen Matkins: On August 17th, the California Corporations Commissioner certified the Nasdaq Capital Market under two key provisions of the Corporate Securities Law of 1968. These certifications will immediately extend significant legal benefits to companies with securities listed on that market.

Previously, the Nasdaq Stock Market operated as an over-the-counter market and consisted of the Nasdaq National Market and the Nasdaq Capital Market (fka Nasdaq SmallCap Market). In 2006, the Nasdaq Stock Market began operating as a national securities exchange. At about the same time, the Nasdaq National Market was renamed the Nasdaq Global Market. The Nasdaq Global Market presently consists of two tiers – the Nasdaq Global Market and the Nasdaq Global Select Market.

Securities listed or authorized for listing on the Nasdaq Global Market are “covered securities” under the National Securities Markets Improvement Act. As a result, California and other states cannot impose qualification or registration requirements under their securities or “blue sky” laws. In 2007, the listing standards for the Nasdaq Capital Market were increased and the SEC added securities listed or approved for listing on that market to the list of “covered securities” for purposes of the NSMIA.

In general, the offer and sale of securities in California must be qualified with the Commissioner unless an exemption from qualification is available or state regulation has been preempted by federal law such as the NSMIA. Long before Congress preempted state qualification requirements for covered securities, California had exempted securities of companies listed on exchanges certified by the Commissioner pursuant to Corporations Code Section 25100(o). This exemption was from the qualification, but not anti-fraud, provisions of California’s securities laws.

While Congress’ enactment of the NSMIA in 1996 seemed to make this exemption irrelevant, it remained important because it is unclear whether the federal preemption of state qualification requirements pursuant to the NSMIA extends to options, warrants and other rights to acquire a listed security. Because Section 25100(o) also excepts warrants and other rights to acquire a security listed or approved for listing on a certified exchange, the exemption continues to be relevant and important.

Despite the SEC’s 2007 decision to extend “covered security” status to Nasdaq Capital Market securities, the Commissioner did not certify that market for purposes of Section 25100(o). This meant that options, warrants and other rights to acquire Nasdaq Capital Market listed securities remained subject to qualification even though the underlying securities were “covered securities”. The Commissioner’s recent certification of the Nasdaq Capital Market means that companies with securities listed on that market will no longer need to be concerned with qualification in California of options, warrants and other rights to acquire their Nasdaq Capital Market listed securities.

The Commissioner has also certified the Nasdaq Capital Market for purposes of Corporations Code Section 25101(a). That statute provides an exemption from qualification for offers and sales of securities in non-issuer (i.e, secondary) transactions. The exemption is available for any security of a person that is the issuer of a security listed on an exchange certified by the Commissioner. While the preemptive effect of the NSMIA obviates the need for this exemption in the case of “covered securities” (or equal or senior securities), the exemption has some residual utility because it covers not just the covered security (or an equal or senior security) but any security issued by a person that is the issuer of a security listed on a certified exchange.

The Commissioner’s certification of the Nasdaq Capital Market will provide a non-securities law benefit to Nasdaq Capital Market companies as well. California has constitutional usury limitations. Pursuant to Corporations Code Section 25117(a), evidences of indebtedness and the purchasers or holders thereof are exempt if the issuer has any security listed or approved for listing on a national securities exchange certified by the Commissioner under Section 25100(o). The Commissioner’s certification should therefore make it easier for smaller publicly traded companies to issue debt without concern for California’s constitutional usury limits.

One of my favorites recently announced his coming retirement from law firm practice, so I thought I would take the opportunity to pick Rich Koppes’ brain since he is so knowledgeable and seen so much. In this podcast, Rich provides a look back at his career and developments in governance during that time, including:

– What has been your career path?
– Tell us about the many hats you wear these days.
– Which parts of your career have been the most fun?
– How has governance changed since you started?
– What additional changes (if any) do you think need to happen in corporate governance?

Congrats to the International Subcommittee of the ABA’s Corporate Governance committee for launching its own blog! We’ll see more corporate lawyers blogging yet…

The SEC’s Investor Advisory Committee and State Law

As the SEC’s Investor Advisory Committee gears up and sets its agenda, I recently received this concern from a member:

It strikes me that the Investor Advisory Committee and some of these discussion topics in particular (e.g. fiduciary duties, majority voting, etc.) may be another means for the SEC to push deeper and deeper into matters traditionally reserved for state law. As are clear by the comment letters on proxy access, there is widespread suspicion/ concern among issuers about the increasing pressure to federalize state corporate law. The activities of this Committee will likely only add fuel to the fire in some respects.

From Clearly Gottlieb: Recently, the SEC approved FINRA’s proposal to adopt NASD Rules 2240 (Disclosure of Control Relationship with Issuer), 2250 (Disclosure of Participation or Interest in Primary or Secondary Distribution) and 3340 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts) as rules in the Consolidated FINRA Rulebook and to redesignate such rules, respectively, as FINRA Rules 2262, 2269 and 5260.

Significantly, in connection with the redesignation of NASD Rule 2240 as new FINRA Rule 2262, the SEC also approved the repeal of existing NYSE Rule 312(f), which (like NASD Rule 2240) addresses conflict of interest issues when a NYSE member firm engages in certain activities involving the securities of an entity with which it is in a control relationship. At the time of our last Alert Memo, the effective date of the rule changes had not yet been announced. FINRA has now issued Regulatory Notice 09-60 indicating that the effective date of the redesignated rules and the corresponding repeal of NYSE Rule 312(f) is December 14, 2009.

2. If so, how long do these oral reports last on average?
– Under five minutes – 22.4%
– Between five and ten minutes – 50.8%
– Between ten and fifteen minutes – 19.4%
– Over fifteen minutes – 7.5%

3. To whom does the company circulate minutes of committee meetings?
– All directors – 40.9%
– Only the committee’s members but allow other directors to request a copy – 47.9%
– Only the committee’s members – 11.3%

Recently, the latest “Spencer Stuart Board Index” – which annually looks at the state of corporate governance among the S&P 500 – was released. Among its findings:

– Majority voting: 65% of boards report that they require directors who fail to secure a majority vote from shareholders to offer their resignations. This is up from 56% last year.
– Director term limits: One-year terms for directors are now the norm in 68% of S&P 500 boards, versus 38% 10 years ago.
– Independent leadership: Half of all boards have only one insider, the CEO, up from 44% last year. And 37% split the chairman and CEO roles, versus 20% a decade ago.

Additionally, the study found that the profile of directors continues to evolve: Of the 333 new independent directors in 2009, just over one-quarter are active CEOs, COOs, or chairmen, down from 53% in 1999. Meanwhile, retired CEOs and leaders of divisions and functions now make up 17% and 21% of the new director pool, respectively.

California’s Placement Agent Legislation

From Keith Bishop of Allen Matkins: Recently, the press has been publishing stories of alleged pay-to-play arrangements at public employee pension funds, including the California Public Employees Retirement System, or CalPERS. Last August, the SEC proposed regulations that would prohibit federally registered investment advisers and certain exempt advisers from providing advisory services to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. The rule would also ban the use of third parties to solicit government business. Last month, Governor Schwarzenegger signed legislation that, among other things, requires California public employee retirement systems to adopt placement agency disclosure policies by June 30, 2010. These policies must impose a 5-year ban for violations. Because this legislation was enacted as an emergency bill, it takes effect immediately.

CalPERS adopted a placement agency policy earlier this year. However, CalPERS did not follow the notice and comment requirements of the California Administrative Procedure Act. Last month, I asked the California Office of Administrative Law for a determination that the CalPERS statement was an “underground regulation” in violation of the APA. Responding to allegations of pay-to-play, CalPERS announced recently that it is initiating a special review of the fees paid by its external managers to placement agents and their related activities.